Benign Growth For Rapid7, Inc. (NASDAQ:RPD) Underpins Its Share Price

You may think that with a price-to-sales (or "P/S") ratio of 2.7x Rapid7, Inc. (NASDAQ:RPD) is a stock worth checking out, seeing as almost half of all the Software companies in the United States have P/S ratios greater than 4.4x and even P/S higher than 11x aren't out of the ordinary. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Rapid7

What Does Rapid7's Recent Performance Look Like?

With revenue growth that's inferior to most other companies of late, Rapid7 has been relatively sluggish. It seems that many are expecting the uninspiring revenue performance to persist, which has repressed the growth of the P/S ratio. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Keen to find out how analysts think Rapid7's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Rapid7's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as low as Rapid7's is when the company's growth is on track to lag the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 12% last year. The latest three year period has also seen an excellent 84% overall rise in revenue, aided somewhat by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 9.4% each year over the next three years. Meanwhile, the rest of the industry is forecast to expand by 14% per annum, which is noticeably more attractive.

With this in consideration, its clear as to why Rapid7's P/S is falling short industry peers. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

What We Can Learn From Rapid7's P/S?

Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Rapid7 maintains its low P/S on the weakness of its forecast growth being lower than the wider industry, as expected. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

You need to take note of risks, for example - Rapid7 has 3 warning signs (and 1 which is significant) we think you should know about.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com